Ofcom has not accurately accounted for how much it will cost internet service providers (ISPs) to comply with a regulatory code aimed at combating online copyright infringement, three major UK ISPs have claimed.02 Oct 2012

In submissions to the communications regulator Ofcom BT, TalkTalk and Everything Everywhere (EE) raised concerns about the cost burdens they could face for complying with its anti-piracy code.

A spokesperson for O2 also told Out-Law.com that it was "disappointed" with Ofcom's proposal and had "shared" with the regulator its "concerns" relating to "the current imbalance in the way the cost recovery formula works". The spokesperson said O2 was continuing discussions with Ofcom about the issue.

The regulator published a revised draft anti-piracy code that would require "ISPs with more than 400,000 broadband-enabled fixed lines – currently BT, Everything Everywhere, O2, Sky, TalkTalk Group and Virgin Media" to send notifications to their subscribers if it is suspected their account has been used to break copyright laws. Ofcom is required to draw up such a code under the Digital Economy Act (DEA).

However, following criticisms from digital rights groups and a challenge over the lawfulness of the DEA in the UK courts that required changes to be made to how the scheme is to be paid for, Ofcom was forced to establish a cost-sharing regime whereby ISPs were liable for only 25% of the cost of sending out the notifications to their customers, with participating rights holder groups liable for the remaining 75% of the cost.

Alongside its draft code Ofcom has set out a draft shared costs order that proposes a "two tariff" system to compensate ISPs for their share of the costs they incur. However, in responses to its consultation on the plans, Ofcom has received criticisms from BT, TalkTalk and EE about the scheme's calculations.

"We believe that Ofcom’s current view of the key 'operational ratios' would significantly understate reality," BT said (15-page / 259KB PDF) in its consultation response. "Ofcom should establish the framework for setting year one fees to more plausible assumptions on these ratios and in a way that explicitly allows for the risk that incurred costs would be under-recovered in the first year of operation. In particular, Ofcom should allow for any under-recovered costs resulting from higher levels of operational activity to be recovered in the second year of operation."

BT said that it is likely that Ofcom had underestimated ISPs' costs of maintaining a customer "helpdesk" and in dealing with complaints relating to the warning notification regime. It added that Ofcom "does not explicitly acknowledge" that ISPs will sustain "ongoing fixed and semi-fixed costs" beyond the first year of the regime being in operation, and encouraged the regulator to "clearly indicate" that such costs can be recovered.

EE's response (8-page / 242KB PDF) also detailed concerns that Ofcom had 'understated' "some operational ratios", including the variable cost of customer calls to call centres in relation to the "proportion" of "Copyright Infringement Reports (CIRs) or letters" that are issued.

It also said that Ofcom "understates the likely reasonable and efficient fixed costs" that ISPs will sustain due to a "flawed methodology" and proposed an alternative calculation for recovering those costs. EE, which operates the Orange and T-Mobile networks, also claimed that Ofcom "understates some variable costs" and added that "other potential variable costs" had been "excluded" from the regulator's calculations.

TalkTalk said (5-page / 154KB PDF) that requiring only ISPs with more than 400,000 fixed broadband customers to comply with the obligations was wrong, and that due to "churn and distortion" that it said will take place in the market as a result of the code, around 20 ISPs should actually have to abide by the obligations.

In addition it said that due to the way Ofcom has arranged its cost recovery tariffs, there would be "a perverse incentive" created "whereby an ISP will be more 'profitable' if it has higher levels of infringement occurring over its network."

Under Ofcom's calculations, BT - the UK's largest ISP - stands to recover 101% of its fixed costs incurred in comply with its obligations under the draft code. This is in contrast to Sky which can expect to recover just 63% of its costs at the other end of the scale. TalkTalk would be expected to recover 66%; Virgin 71%; EE 81% and O2 69% of their fixed costs, according to Ofcom's projections.

In its consultation document, Ofcom acknowledged the disparity but said it was the fairest system of the ones it had investigated.

"A two tariff system does not remove entirely differentials in the proportion of fixed costs that ISPs may recover (assuming that CIRs are received in proportion to the relative sizes of their subscriber bases)," Ofcom said in June. "However, we consider that it is likely to achieve the best balance between that objective and a tariff-setting mechanism that is not unduly complex, so as to prejudice the effective implementation of the scheme."

"The additional variable that a third notification fee, applying to BT alone, would introduce, would in our view materially increase the risk of the [costs regime being too complex], which is not justified by the potential reduction in the cost recovery differentials between ISPs that it might achieve," it added.

The draft code and the draft shared costs order are due to be put before the House of Lords on 8 October and before the House of Commons on 24 October. The legislation can not be amended at this stage, but only passed or rejected. The two instruments are then subject to scrutiny by the European Commission, which could take up to three months to give its clearance.

Peter Bradwell of digital rights campaigners the Open Rights Group (ORG) told Out-Law.com that the time from the end of Ofcom's consultation, on 18 September, to the instruments going before the Lords on 8 October, may not be sufficient for concerns raised in the consultation to be addressed.

"20 days does not seem like enough time to consider responses to a consultation of this length and complexity and submit a revised code," Bradwell said. "But what is worse is that the consultation on the [shared costs] order was published on the same day that the order was laid before Parliament, which suggests the Government were either supremely confident in what they were submitting, or not of a mind to listen to the comments they received back."

"The Department for Culture Media and Sport [previously] told the Secondary Legislation Scrutiny Committee that the consultation was on the implementation of the order, not the instrument itself. It's not clear what that might mean. And the detailed questions Ofcom asked in the consultation document suggest otherwise," he added.

A spokesman for Ofcom told Out-Law.com that the regulator would issue a statement that addresses issues relating to the practical workings of both the draft code and shared costs order "in due course". He said that Parliament is expected to ratify the two pieces of legislation early next year, providing they are passed by the House of Lords, House of Commons and European Commission.

The spokesman added that the timetable for suspected online copyright infringers to be issued with the first letters warning them about their behaviour was still on track, with such notifications due to be issued from early in 2014.